A Theory of SPACs

We explore an equilibrium allocation and efficiency when private firms are listed by merging with a SPAC, compared with those when they are listed through a traditional IPO. We show that a traditional IPO is more informationally efficient than a SPAC, except if the traditional IPO process is sufficiently long and costly. We also indicate that the private firms' willingness to select merging with a SPAC instead of a traditional IPO depends strongly on the choices of the information acquisition strategies of underwriters and sponsors. Our comparative static results suggest that in a hotter market, SPAC acquisitions are more likely to occur than traditional IPOs in a typical situation in which underwriters acquire information but sponsors do not. However, if the traditional IPO process becomes substantially long and costly, these predictions may be modified.